All the Facts: Cosigning Your Child’s Student Loan Refinance

Cosigning-Your-Childs-Student-Loan-Refinance

Student loan refinancing can provide significant savings to the right person. But qualifying on your own can be challenging — especially if you’re a recent college graduate.

If you’re a parent of a student loan borrower who can benefit from refinancing student debt, cosigning their loan application can improve their odds of getting approved.

Before you do, however, it’s essential to understand the impact that cosigning your child’s student loan refinance can have on your credit history, as well as your finances. Here’s what you need to know before you agree.

How cosigning your child’s student loan refinance works

Student loan refinancing is the process of replacing one or more existing student loans with a new one. In the right circumstance, refinancing student debt can help you reduce your interest rate and monthly payment. It may also give you some added flexibility to pay off your debt faster with a shorter repayment term.

But getting approved to refinance student debt can be difficult unless your credit history is strong and you have a relatively high income — both of which aren’t easy for new college graduates.

That’s where parents come in handy. If you meet the requirements, adding your name to the loan application can help improve your child’s chances of getting approved. Even if they can get approved on their own, cosigning can also make it easier for them to get approved for a lower interest rate — if you have a high credit score — which will increase their savings.

What a cosigner is responsible for

When you cosign a loan application, you’re not just lending your good name, so to speak. You’ll actually be responsible for paying off the debt if your child can’t. For this reason, it’s a good idea to consider cosigning only if you’re confident that it wouldn’t come to that — or if you could handle the payments if it did.

Even if you’re confident, the future is uncertain, and your child may experience financial hardship. In that case, it’s crucial that you have enough income and savings to continue making payments until they get back on their feet. If your financial situation isn’t in good enough shape to be able to do that, cosigning could add unnecessary risk to your life.

How your credit history can impact your child’s refinance

Most lenders use what’s called risk-based pricing to determine what interest rate to charge. The more risk the borrower poses to the lender — which they can usually determine with a credit check — the higher you can expect the interest rate to be.

That’s why cosigning can help improve your child’s approval odds, but it’s not a guarantee. If your credit history is in great shape because you’ve always paid your bills on time, kept your credit card balances relatively low, and practiced other good credit habits, it can make it easier for your child to get approved with a lower interest rate than what they could get on their own.

However, if your credit history is a bit checkered, cosigning may not help much, if at all. So before you agree to help, check your FICO credit score using a free service like Experian or Discover Credit Scorecard. Here are the different FICO score ranges to give you an idea of where you stand:

  • Excellent: 800 to 850
  • Very good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Very poor: 300 to 579

Does cosigning a student loan refinance affect credit?

Wondering if cosigning a student loan refinance affects your credit score? The answer is yes. Here’s how.

  • Credit inquiry: When you first apply for the loan with your child, the lender will run a hard inquiry on your credit report. According to FICO, each hard inquiry remains on your credit report for two years and can affect your credit score for one year. That said, most people will see their score drop by fewer than five points with each hard inquiry.
  • Amounts owed: The new loan will show up on your credit report because you have responsibility for paying it if your child can’t. It may or may not have an impact on your credit score, but future lenders will be able to see it, and it may impact their decision to offer you credit.
  • Late or delinquent payments: If your child happens to miss a payment for 30 days or more, that negative item will show up on both their and your credit reports. Because payment history is the most influential factor in your FICO credit score, it could damage your score

These potential drawbacks aren’t necessarily a reason not to cosign your child’s student loan refinance. It is, however, important that you understand the potential risks, and maintain open communication with your child, so that you can be aware if anything is happening that could harm your credit.

What is cosigner release?

Some student loan refinance lenders offer a feature called cosigner release, which can make it easier for you to get off the loan before your child pays it off.

Here’s how cosigner release works: after your child has made a certain number of consecutive on-time payments — the number can vary by lender but typically ranges from 12 to 48 — they can apply to release you from the loan. At that time, the lender will run another credit check on your child to determine if their credit is good enough on its own to justify the release.

If it is, you’ll be removed from the loan, and it will no longer impact your credit history or finances. Keep in mind, though, that a cosigner release request can be extremely difficult to get approved. According to a 2015 report by the Consumer Financial Protection Bureau, only 10% of people who applied for cosigner release were approved.

The bottom line

Cosigning your child’s student loan refinance can help them save money as they pay down their student loans, and it may even help eliminate the debt faster.

Before you agree to it, though, it’s important to understand whether your credit and financial situation is good enough to help. Also, it’s crucial to know how the loan can affect your credit score and history going forward and your chances of getting approved for credit when you need it.

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